Fed Gets Room to Ease With Little Growth or Inflation

June 14 (Bloomberg) -- More Americans applied for jobless
benefits and consumer prices dropped by the most in three years,
giving the Federal Reserve room to spur an economy that’s
generating little growth or inflation.

Claims for unemployment insurance payments unexpectedly
climbed by 6,000 to 386,000 in the week ended June 9, Labor
Department figures showed today in Washington. The cost of
living fell 0.3 percent in May, led by the biggest decrease in
gasoline prices in three years, the agency also reported.

Stocks rose as investors increased bets Fed policy makers
meeting next week will take additional steps to boost growth and
cut an unemployment rate stuck above 8 percent since February
2009. Cheaper energy costs also provide some relief for
Americans against a backdrop of moderating job and wage gains
that has slowed consumer spending.

“The Fed is really concerned about the outlook for
employment and growth,” said Kevin Logan, the chief U.S.
economist at HSBC Securities USA Inc. in New York who correctly
forecast the decline in prices. “They’ve been pretty sanguine
about the inflation outlook, and today’s data certainly didn’t
contradict that outlook.”

The Standard & Poor’s 500 Index climbed 1.1 percent to
1,329.1 at the 4 p.m. close in New York. Shares extended gains
late in the day amid reports policy makers may take steps to
help economies battered by Europe’s debt crisis.

Investors were also waiting for the results of elections in
Greece this weekend that may determine the fate of the euro.

Food costs were unchanged as gains in fruit and vegetables
were offset by cheaper beverages, dairy products and meats.

Consumer prices increased 1.7 percent in the 12 months
ended in May, the smallest 12-month gain since January 2011, the
report showed.

Fed policy makers, who said they anticipated the run-up in
energy costs would subside, aim for 2 percent inflation as part
of their dual mandate of stable prices and maximum employment.
Their preferred price gauge, issued by the Commerce Department
and tied to consumer spending, rose 1.8 percent in the 12 months
ended in April, the smallest gain in more than a year.

Fed Views

Fed Vice Chairman Janet Yellen said last week she sees more
scope for easing, while San Francisco Fed President John
Williams, a voting member of the FOMC this year, called on
policy makers to stand ready to act should the recovery falter.

“Substantial resource slack in U.S. labor and product
markets should continue to restrain inflationary pressures,”
Fed Chairman Ben S. Bernanke told Congress’s Joint Economic
Committee last week. With a “subdued” inflation outlook, high
unemployment and “strains in global financial markets,” the
central bank anticipates it will keep its benchmark lending rate
near zero though late 2014, he said.

The so-called core measure, which excludes more volatile
food and energy costs, increased 0.2 percent in May for a third
month. They were up 2.3 percent over the past 12 months,
matching the gains for years ended in April and March.

The increase in the core measure was driven by medical
care, cars and airfares. A measure used to calculate how much an
owner-occupied house would rent for showed a 0.1 percent last
month, the smallest increase since February.

Lower Expectations

Inflation expectations have “definitely come down,” David
Tehle, chief financial officer of Dollar General Corp., said
during a June 4 earnings call. The Goodlettsville, Tennessee-based dollar-store chain anticipates 0.5 percent inflation for
the full year, compared with 2 percent in the final three months
of 2011, Tehle said.

Dollar General expects no apparel inflation this year and
sees broad slowing in commodity prices, Chief Executive Officer
Rick Dreiling said during the call.

The drop in the cost of living last month allowed Americans
to stretch their paychecks further, another Labor Department
report showed. Hourly earnings adjusted for inflation climbed
0.3 percent, the biggest increase since April 2010.

That is probably one reason confidence is improving. The
Bloomberg Consumer Comfort Index rose to minus 36.4 in the week
ended June 10, marking the highest level since late April, from
minus 37.6 the prior period, according to another report today.
Each of three components -- the economy, finances and buying
plans -- advanced.

“It is likely a function of the steady drop in gasoline
prices,” said Joseph Brusuelas, a senior economist at Bloomberg
LP in New York. “Households feel a bit more comfortable about
their own financial situation.”